As I noted after the Satellite 2016 conference a couple of weeks ago, the outline of an FCC compromise over Globalstar’s TLPS proposal has become clear in recent weeks. That would involve increased sharing of the Big LEO L-band spectrum (which led Jay Monroe to use nearly as many F-words about Matt Desch as he did about me at the conference) and a restriction of the initial approval to operate at a power level of not more than 200mW (consistent with, but not specifically limited to, indoor operation). Then testing of Globalstar’s (supposedly all-capable, but apparently not yet contracted from ViaSat or even fully defined) Network Operating System would be required to demonstrate that any interference would be prevented, before any potential increase in power levels would be contemplated.
This mechanism was sought by Globalstar because then it would have an authorization for commercial deployment and, on the back of that, could go and raise $150M to keep the company funded (and avoid Jay having to put in any more money) for the next couple of years, while Globalstar looked for a partner that would attribute value to TLPS. Of course that may well be an endless task, if the cable companies do not “have an interest in leasing or buying Globalstar’s spectrum even if that company received approval by the FCC” and Cisco is unwilling to pay billions of dollars to acquire Globalstar.
I was told that an FCC order would very likely come before the end of this month, because the FCC wanted to get a precedent in place (of non-interference with existing unlicensed services, as recommended by Public Knowledge) before it considered what to do about LTE-U.
However, it seems everyone reckoned without Google’s continued interest in the proceeding, which has now forced Public Knowledge to change its tune, and emphasize that the FCC should impose the “public interest condition” of “authoriz[ing] reciprocal public use of Wi-Fi Channel 14 in locations where Globalstar’s TLPS is not deployed…in return for the auction-free windfall that Globalstar seeks.”
Google’s insistence on the “examination of options for general public use of Wi-Fi Channel 14″ seems like just the sort of poison pill that would prevent Globalstar from raising additional funding after the initial approval, because who would give Globalstar money for spectrum that they could use anyway whenever Globalstar had not deployed in a given location?
So if the FCC does include this condition, it seems highly likely that Jay will reject the deal, just as he did last summer when the FCC tried another compromise that would have involved low power approval only within Globalstar’s licensed spectrum, along with increased L-band sharing with Iridium. As a result, the uncertainty about the eventual outcome of the TLPS proceeding may last a little longer yet.
The Satellite 2016 conference this week has reminded me of years past. All the talk has been of ViaSat and their new ViaSat-3 1Tbps high throughput satellite (depicted above), just like in 2004 when Mark Dankberg used his Satellite Executive of the Year speech to describe his ambitions to build a 100Gbps satellite. Unlike back then (when most dismissed Dankberg’s plans as pie-in-the-sky), ViaSat’s announcement has already caused some large investment decisions by major operators to be postponed, and re-evaluated or perhaps even cancelled. Indeed the entire industry seems frozen like a deer in the headlights, trying to decide which way to run.
Some competitors, like Inmarsat, have chosen to portray ViaSat-3 as a “mythical beast” and ViaSat’s current offering of free streaming video on JetBlue as a “marketing stunt”. However, its far more serious than that. One perceptive observer suggested to me that its like competing for the presidency against Donald Trump: how do you respond to a competitor who is clearly intelligent and has a plan to win, but deliberately says things that fundamentally contradict your (supposedly rational) world view.
In the satellite industry the prevailing world view is that (at least in the foreseeable future) there is no need to build 1Tbps satellites offering capacity at $100/Mbps/mo, because satellite broadband will never compete directly with terrestrial and capture tens of millions of subscribers. But if ViaSat is determined to blow up the industry, most current business plans for two-way data applications (including essentially all Ku-band data services) are simply no longer viable. And if competitors remain frozen (or worse still dismissive) in response to ViaSat’s plans, then ViaSat will gain a head start on building these new higher capacity satellites.
In addition to this overarching theme, several other nuggets of information emerged: Inmarsat is acquiring a seventh “GX payload” by taking over Telenor’s Thor-7 Ka-band payload in Europe on a long term lease, presumably at a very attractive rate (perhaps even approaching the Eutelsat-Facebook-Spacecom deal price of ~$1M/Gbps/year, given Telenor’s lack of Ka-band customers). And Globalstar now appears to have a roughly 60%-70% chance of getting FCC approval for TLPS in the next couple of months, given the FCC’s desire to set a precedent of protection for existing unlicensed services that can be used in the upcoming LTE-U rulemaking. However, it appears that any deal would require a compromise of 200mW power limits (the maximum level demonstrated to date) and sharing of Globalstar’s L-band spectrum above 1616MHz with Iridium.
Going back to the title of this post, if last year’s conference felt like 1999, with exuberance about multiple new satellite projects, this year felt like 2000, as attendees peer over the edge of the precipice. Following on from that, next year could be like 2001, with pain to be shared all around the industry: a sharp fall in satellite orders, as operators re-evaluate the feasibility of their planned satellites, a continuing fall in prices, and the possibility of stranded capacity, either at operators, who are unable to sell their growing inventory of HTS capacity, or at distributors, who entered into contracts for capacity leases at prices far above current market rates.
As I predicted back in January, American Airlines has now selected ViaSat over Gogo to equip its next batch of 200 new 737 aircraft. However, Gogo rejected American’s notification that “ViaSat offers an in-flight connectivity system that materially improves on Gogo’s air-to-ground system” which led American to file a petition for declaratory judgment to enforce its rights under the contract with Gogo.
The clause in dispute is 13.5.2 which reads as follows (with certain confidential information redacted):
With respect to each of the Fleet Types, if at any time after the [***] of the Trigger Date for such Fleet Type (A) an in-flight connectivity services provider other than Aircell offers a connectivity service (B) that provides a material improvement in connectivity functionality [***] (C) such that American reasonably believes that failing to offer such service to passengers on such Fleet Type would likely cause competitive harm to American by [***], (D) such competitive system is installed and in commercial operation on [***], and (E) American has completed sourcing processes with respect to the competitive offering sufficiently rigorous such that American can validate the technology, functionality and feasibility of the competitive offering and provide objective system performance and functionality criteria to Aircell for its use in determining whether it wishes to submit a proposal as contemplated below, then American may provide written notice thereof (including such criteria) to Aircell. In such event, Aircell will have the opportunity to submit a proposal to provide such service to American, which proposal will include, without limitation, proposed terms regarding pricing, system functionality and implementation dates, within [***] after receipt of such notice, and if Aircell timely submits such proposal then American will in good faith consider such proposal. If American reasonably determines that Aircell’s proposal is at least as favorable as the competitor’s offering, this Agreement will be amended to incorporate such additional or replacement offering or functionality and the agreed upon terms. If Aircell declines or fails to submit a proposal to American within such [***], or if American reasonably determines that Aircell’s proposal is not as favorable as the competitor’s offering, then American may elect to termination this Agreement with respect to such Fleet Type. Such election must be made by providing at least [***] advance notice thereof to Gogo, and in such event this Agreement will terminate as and to the extent and otherwise in accordance with American’s termination notice. Notwithstanding anything to the contrary contained herein, American shall not be required to provide to Aircell any information that American may not disclose pursuant to confidentiality obligations to any third party.
It seems that Gogo could only have based its rejection of American’s notice on an assertion that either ViaSat’s service is not a “material improvement” (over basic ATG!) or that it is not in “commercial operation” but neither rationale appears likely to hold up in court. Moreover, the competition to equip American’s next gen 737 fleet has been going on for the last six months or more and Gogo has already offered 2Ku to American in this competition. In fact, according to Runway Girl Network, American told Gogo some time ago to stop working on the STCs needed to install 2Ku on American’s new planes.
UPDATE (2/18): According to Runway Girl Network (although not specified in Gogo’s public filings), the suit “covers approximately 200 of the carrier’s 737 aircraft known as the ‘pre-Apollo’ fleet”, which are older aircraft (delivered before 2009) “flying with ATG today and no in-seat IFE screens.” A key difference between these older aircraft and American’s decision to desire to use ViaSat on future deliveries, is that Clause 13.5.2 references a different “Trigger Date” for each “Fleet Type” and so it seems likely that the time period, after which a termination notice can be issued for the new aircraft deliveries, has not yet expired, and American may therefore not have the right to terminate the Agreement in respect of its new aircraft fleet at this point in time. Conversely, American certainly has the right to terminate the older aircraft even though for some of them, with limited remaining lifespan, it may not be economic to retrofit with satellite communications.
So I’m forced to conclude that in reality, Gogo is simply trying to delay American’s decision to select ViaSat for future aircraft, probably threatening litigation as it initiated (and lost) against Southwest when it purchased AirTran and switched that fleet of Gogo-equipped aircraft to Global Eagle (Delta ultimately purchased 88 of the 128 aircraft which remained on Gogo). And in response, American seems to have decided that it would go nuclear by issuing a termination notice on older aircraft, and a public lawsuit, in order to force Gogo’s hand. However, Gogo made a further filing on Tuesday Feb 17, stating that it had rescinded its prior letter which had questioned American’s termination notice (on the grounds of “system performance and functionality of the competitive technology”), and claimed that as a result American’s suit was now “moot,” presumably in an effort to limit the public airing of the two companies’ disagreements.
After all, if American did not exercise its rights under Clause 13.5.2 of the agreement, it appears that it would have to use Clause 13.5.1, which contemplates a payment to Gogo apparently equal to at least a year’s revenue per plane:
American will have the right to terminate this Agreement at any time on or after the [***] of the Trigger Date for the last retrofitted Fleet Type, by giving [***] written notice and paying Aircell an amount equal to the amount obtained by multiplying (A) [***] by (B) Aircell’s [***] from Connectivity Revenues earned by Aircell in the year ending on the applicable anniversary of the Trigger Date.
Gogo has declared that it now plans “to submit a competing proposal to install our latest satellite technology – 2Ku – on this fleet”. However, given that American has already considered 2Ku with regard to “system functionality and implementation dates” for its newer aircraft, Gogo’s only option to improve its offer would be to reduce the pricing significantly. As I’ve noted in conference presentations, ViaSat is providing significantly better service, to 4-5 times more passengers, with a revenue per boarded passenger of around $0.50, compared to the $0.80 that Gogo currently generates from its ATG network. In other words, ViaSat’s revenue per Mbyte is something like a factor of 10 lower than Gogo generates at present (and remember Gogo has told investors that the cost of capacity for 2Ku is similar to ATG-4, albeit with future reductions expected as Ku HTS satellite capacity becomes cheaper).
It therefore seems that Gogo will lose either way: it either loses American’s old and/or new aircraft, setting the scene for a complete termination of the existing contract if ViaSat proves to offer a significantly superior service, or it wins the deal by offering dramatically lower pricing, which will reduce its revenue per boarded passenger and increase its capacity costs on these new aircraft, and would presumably provide a benchmark for a renegotiation of the deal covering the rest of the American fleet. That would be a far different trajectory from the increases to as much as $4-$5 per boarded passenger that Gogo set out as its long term objective in previous analyst days.
However, it remains to be seen how and whether American will ultimately be able to proceed with its original plan to install ViaSat on new aircraft deliveries, or whether we are set for a long and ugly stalemate between American and Gogo over how these aircraft will be equipped.
“I’m half crazy all for the love of you” is a good description of the state of mind of Globalstar investors and perhaps even more appropriately, this is the song HAL sings as he’s shut down in 2001: A Space Odyssey. But now Globalstar apparently has its answer, delivered by “Smitty” and the heads of the International Bureau and the Office of Engineering and Technology in a meeting on January 14.
It seems Globalstar was nervous about the outcome, carefully scheduling its Odeon conference call several days before this meeting (on January 11), so that the company could say that it “has not been asked by the Commission to provide any further technical data or engage in any additional testing.” Even now there would not be any formal demand made by the Commission, merely a discussion of how the proceeding could be brought to a conclusion.
Globalstar’s hopes were raised by the intervention of Public Knowledge in November, who (while not thinking much of Globalstar’s attempt to devise “yet-another-sure-fire-plan-to–make-beaucoup-bucks-using-ATC-and-this-time-TOTALLY-not-go-bankrupt“), saw this as an opportunity to set a precedent for the upcoming rulemaking on LTE-U, requiring new users of unlicensed spectrum (i.e. cellular operators) to guarantee that they will prevent interference and resolve any complaints that do arise.
However, numerous technical issues remain outstanding, because Globalstar has steadfastly maintained that its program of demonstrations (rather than cooperative laboratory testing) provides a sufficient record for the FCC to reach a decision, and as I indicated previously, Globalstar rejected a proposed FCC compromise last summer.
What is notable about the latest ex parte filing is how half-hearted Globalstar’s statements are compared to its submission in December, which at least tries to highlight some of the technical arguments. In the new filing, Globalstar doesn’t even bother to put additional details about its “Network Operating System” for resolving interference on the record, despite Public Knowledge stating last week that “For the Commission to formulate service rules, Globalstar must provide greater detail on how its proposed mitigation mechanism would work” and Globalstar apparently telling investors on the Odeon call that the “Company will succinctly address ‘framework’ and ‘additional testing’ from the new PK Ex Parte in the coming days.”
Its therefore pretty easy to conclude that far from this representing the last step before approval as some of Globalstar’s “half crazy” investors apparently think, the FCC indicated that more information will be required before they are prepared to even consider moving forward, likely in the form of a cooperative testing plan agreed with opponents. Some have suggested that if such a discussion had happened, Globalstar would have been obligated to put it in the ex parte filing, but the FCC’s ex parte rules at §1.1204 (a)(10)(iii) specifically note that “information relating to how a proceeding should or could be settled, as opposed to new information regarding the merits, shall not be deemed to be new information” that must be summarized.
Given these developments, and a share price which has now fallen by more than 50% in the last six weeks, it hardly seems like great timing for Globalstar’s new COO to start work. However, if TLPS is not going to be approved any time soon, Globalstar will have to focus on making something (however modest) of the MSS business, if only to minimize the cure payments due under the COFACE agreement in the next couple of years, and hope that additional funding can be found to meet these obligations.
Its been interesting to see Inmarsat’s stock price rising recently based on excitement about the prospects for its inflight connectivity business, as well as the fourth GX satellite (which Inmarsat hopes to lease to the Chinese government as the Financial Times also reported in October).
We published our new Inmarsat profile in December which highlights the company’s prospects for strong revenue growth from GX over the next few years, although since then Inmarsat has faced a few setbacks, with the Intelsat appeal of Inmarsat’s US Navy contract win being sustained and Apax finally emerging as the purchaser of Airbus’s Vizada division, despite Inmarsat telling people before Christmas it expected to buy this business in early 2016.
However, there is the potential for an even more worrying development in the near future, with ViaSat expected to give more details of its ViaSat-3 project in early February. This seems to represent something of an acceleration in ViaSat’s plans since last November, and it now looks possible that this announcement could include deals with some large new airline customers to provide advanced passenger connectivity services.
If it can be realized, ViaSat’s proposed 1Tbps capacity for ViaSat-3 would have a dramatic impact on bandwidth expectations and more importantly the low cost of capacity would make it feasible to offer low cost or free Internet connectivity, including streaming video, to airline passengers, even as data consumption continues to grow rapidly in the future. ViaSat could potentially do deals with Southwest and/or American, the first of these sounding the long awaited death knell for GEE/Row44′s connectivity business and the second proving disastrous for Gogo, which currently gets about 40% of its passenger connectivity revenues from American Airlines (though any fleetwide migration to ViaSat wouldn’t happen until after the current 10 year contract expires in 2018, just as seems likely for Virgin America).
That really would represent an explosion in the inflight connectivity market, though not one which would be welcomed by other satellite operators and service providers, many of whom have a difficult relationship with ViaSat. Indeed its notable how ViaSat is now also throwing its one-time partner Thales LiveTV under the bus, claiming that they mounted “a campaign of whispers…alleging that Exede did not meet its advertised performance.”
The implications of deals that could ultimately bring ViaSat’s number of served aircraft in North America up to as many as 2000 planes (i.e. half the equipped fleet) would be wide ranging, not least for inflight connectivity service providers, who’ve become used to seeing Gogo and Panasonic as the market leaders, and passengers, who’ve become accustomed to a market where “Inflight Wi-Fi Is Expensive, and No One Uses It.”
Even amongst satellite operators there could be some upheaval, with Inmarsat having just ordered $600M of I6 satellites (actually $900M+ including launch, insurance and ground segment costs) carrying what looks, in comparison, like a puny ~30Gbps per satellite, SES having signed a ten year $290M bandwidth contract with GEE in November 2014, and Intelsat potentially set to lose some of its claimed “73% share of today’s aeronautical satellite communications market.” Most importantly, if passenger expectations of free or low cost inflight WiFi start to spread beyond North America, then Inmarsat’s estimate that its European Air-To-Ground network will generate $300K per plane per year (more than double Gogo’s current run rate) would look even more questionable.
Widespread angst about the effects of new HTS satellites and slowing revenue growth is already weighing on the outlook for the satellite industry, but if ViaSat really does have one or more big deals to announce next month, then it would take concerns over future capacity and pricing trends to a whole new level. In that case we’d better all buckle in and get prepared for a very bumpy ride.
I woke up this morning to read New Street Research’s latest 3Q2015 Wireless Trends Review, subtitled “Competition Gets Ugly: The Big Guys Have A Problem” and while I agree that competitive pressures in the US wireless market are getting ugly, I’m afraid it is the analysts rather the “Big Guys” that have a problem. In particular, New Street’s “network capacity framework” that suggests Verizon “have half the capacity they will need by 2020 to maintain current network quality” is based on a completely flawed premise, just like most other pronouncements of an imminent spectrum crisis.
This network capacity framework calculates the number of “MHz-sites” that Verizon has for LTE in the top 25 markets and assumes that data demand will grow at 30% from 2015 to 2020 (reaching 10GB/LTE sub per month by then). Ignoring the fact that New St doesn’t know its Petabytes (1 million Gbytes) from its Exabytes (1 billion Gbytes), Verizon’s “aggregate LTE data demand” is projected to increase five fold between 2015 and 2020, while Verizon is expected to increase its deployed LTE spectrum from 68 to 138MHz and its number of LTE macrosites in these markets from 21K to 27.2K over the period, which supposedly will result in 2.5 times growth in network capacity. Thus New St concludes that Verizon will have only half the capacity needed to meet demand, without buying more spectrum from DISH.
This thesis is even more flawed than the Brattle Group study for CTIA back in June, because it completely fails to consider the potential for improvements in network efficiency over the period as LTE-Advanced technologies are deployed. Even Brattle Group acknowledges that “LTE+” will carry over 70% more bps per Hz than 4G LTE, based on a move from 2×2 MIMO to 4×4 MIMO, and the original source for these estimates (Rysavy Research’s August 2014 paper on “Beyond LTE: Enabling the Mobile Broadband Explosion“) acknowledges that many additional improvements are feasible.
Correcting for this error alone, and assuming capacity constrained locations are upgraded to LTE-Advanced by 2020, New Street’s supposed capacity shortfall is reduced from 50% to 14%, and so the number of additional macro sites that Verizon would need to build is reduced from 26.7K to only 4.5K (which based on the FCC’s October 2010 estimate of $550K per cellsite would cost only $2.5B in incremental capex). That hardly seems to justify Verizon spending tens of billions of dollars to buy DISH’s spectrum.
New Street also ignore other sources of incremental capacity (such as LTE-U) and reject small cells as infeasible because they have supposedly only 1/3 the capacity of macro sites (Rysavy in fact points out in Figure 68 of his report that through careful placement to meet hotspot demand, four picocells per macrocell could produce roughly a 10x increase in capacity).
Its hardly surprising that New Street conclude Verizon’s behavior is “perplexing” and suggest that rather than “discounting to hang onto subs” Verizon “should be taking up price to shed subs faster in congested markets to preserve superior network performance for their most valuable subs.” But perhaps Verizon do actually understand network engineering and the potential for network capacity enhancements better than analysts with a simplistic, erroneous spreadsheet model?
In these circumstances Verizon would also feel happy to say no to Ergen’s blackmail and refuse to pay more than their previous offer for DISH’s spectrum (which I guess is around $1/MHzPOP). In fact, it would seem likely that Verizon don’t want a deal at any price ahead of the incentive auction, if that would enable Ergen to bid up the price of spectrum once again. On the other hand, Ergen is undoubtedly keen to find a partner to endorse the value of his spectrum holdings and force Verizon back to the table. As part of that effort, I’m told he has been visiting Google again recently, just as he did back in 2012 when he was trying to pressure AT&T to do a spectrum deal.
One possibility for such a partnership would be to reinvigorate DISH’s rooftop small cell deployment plan, and meet Ergen’s AWS-4 buildout requirements, using the AWS-4 uplinks (2000-2020MHz) as downlinks in conjunction with his 1695-1710MHz uplink spectrum. Remember that Google has backed similar efforts in the past, when it funded Clearwire (rather than LightSquared) in 2008, in order to get a competitive 4G network built out quickly, and push Verizon and AT&T to do the same. However, Ergen has little more than a month left to get a deal done before the auction restrictions kick in, so time is not on his side.
Inmarsat has certainly had a great deal of success in the last two months, winning key contracts with the US Navy, Lufthansa and most recently Singapore Airlines, as well as a strategic partnership with Deutsche Telekom to built out its S-band European Aviation Network. While some of these wins may be a direct result of what Inmarsat refers to as “success-based capex” (otherwise known as giving away free terminals), these deals certainly have the potential to provide a significant boost to the company’s revenue growth outlook.
Moreover, it seems that the biggest deal is yet to come, as Inmarsat hinted on its results call last week that “customers in different regions [are] vying to have the [fourth GX] satellite placed over their areas of interest” and the plan for this satellite is expected to be finalized before Inmarsat announces its Q4 results in early 2016. However, in practice there is one deal which is far and away the most likely outcome, and it appears these statements are simply a matter of Inmarsat trying to make sure that it still has some negotiating leverage.
That deal was clearly apparent during last month’s State Visit to the UK by Chinese President Xi Jinping, when the only British company he visited was Inmarsat. Inmarsat highlighted that one purpose was “to understand how Inmarsat is able to uniquely contribute to President Xi’s One Belt One Road (‘OBOR’) strategic vision through the provision of critical global mobile broadband connectivity services, including Inmarsat’s revolutionary new service, Global Xpress” and noted that “Inmarsat has already signed a Memorandum of Understanding (MOU) with China Transport Telecommunication & Information Centre (CTTIC) to establish a strategic partnership to deliver Inmarsat’s revolutionary Inmarsat-5 Global Xpress mobile satellite broadband communications connectivity throughout China and OBOR.”
I’m told that the original intention of President Xi’s visit, accompanied by HRH The Duke of York and the UK Chief Secretary to the Treasury, was to have a signing ceremony for the agreement to formalize this “strategic partnership” and that would involve a full lease of the fourth GX satellite to China. Unfortunately the final agreement required certain changes and therefore could not be completed in time.
However, assuming this deal can be completed, Inmarsat is likely to receive a further significant boost to its revenues. Given Chinese expectations are typically that they will receive lower prices than other countries, I’d expect the payments to Inmarsat for capacity could potentially be on the order of $100M p.a. (assuming the agreement is for 10+ years), depending on who covers the capex and opex costs for the new GX gateways in China. And China could then be in a position to provide free or subsidized satellite broadband capacity to adjacent countries in support of its geopolitical OBOR ambitions, just as Google and Facebook have been working to bring Internet access to developing countries.
Once this deal is done, Inmarsat can move onto ordering I6 satellites with both L-band and Ka-band capacity, in order to supplement the (somewhat limited) capacity of the initial GX constellation. But with Eutelsat apparently looking for French government backing to buy a 3-4 satellite Ka-band system, and ViaSat (not coincidentally) announcing the intention to build its own even bigger 1Tbps satellites, the race to add lower cost Ka-band capacity is far from over. More importantly, despite all the attention given to Ku-band HTS in the last year or two, its hard to agree with the statement Gogo made on its Q3 results call (after its GX distribution deal with Inmarsat was terminated) that “there are simply not enough Ka satellites now or for the foreseeable future to meet the needs of global aviation”.
Paris is the place to be in September for satellite industry gossip (though not the weather), and this year is no different. There’s been plenty of chatter already about the MSS sector, as people look forward to Inmarsat’s upcoming investor day on October 8. The company has seen some good news recently, displacing Intelsat General to win a large US Navy contract last week. However, Inmarsat’s aggressiveness on price is highlighted by the reduction in the total ceiling price from $543M last time around to only $450M over 5 years (which is in turn perhaps double the US Navy’s most likely spending profile). Though this contract should help Inmarsat show top line revenue growth in 2016 and beyond, a significant proportion of the capacity (in C, Ku and X-band) will have to be bought in from other players, limiting Inmarsat’s ability to make a profit.
However, the other main news about Inmarsat is that the company is expected to order its first I6 L-band satellite before the end of 2015, and it will include substantial additional Ka-band capacity to supplement the rather limited amount of capacity available on GX, even after the fourth GX satellite is launched in 2016 or 2017. That will likely mean a total capital expenditure of $450M-$500M, plausibly repeated once or twice more in the next few years, just to keep Inmarsat in the bandwidth race.
There’s also been some chatter about the FCC regulatory situation as it affects Globalstar, where a source confirms that my suppositions in June about the purpose of Globalstar’s change in tone to the FCC were correct and that a deal was on the table to approve terrestrial use just for Globalstar’s own MSS spectrum and not the wider 22MHz TLPS channel. However, this approval was only going to be for low power use, and would therefore not be of much import, except as a demonstration of regulatory progress.
Then after Jay Monroe met with several FCC Commissioners in late July he withdrew this potential compromise and insisted instead on full TLPS approval, presumably believing that if permission either to use the unlicensed spectrum or high power terrestrial use or the MSS band was treated as a separate, second stage of the process, a conclusion would be delayed for years, making it impossible for Globalstar to deploy or monetize its spectrum anytime soon.
So now it seems we are back to an impasse, and though Globalstar has recently added some additional information into the docket on an experimental deployment in Chicago, this documentation doesn’t provide quantitative information on (for example) the exact rise in bit error rates seen by services like Bluetooth, merely observing that no observable performance impact was noted. As a result, I believe it is unlikely that the FCC will feel able to rule on full TLPS approval anytime soon (i.e. this year).
Ironically, Globalstar’s consultants are also acting for LightSquared, and have proposed a similar program of tests for GPS interference, again based on a “KPI” criteria of observable degradation in performance, rather than actual quantified impact on the signal to noise ratio. Most observers seem to believe that LightSquared is no more likely to gain FCC approval for its plans than before, and that after the recent publication of the DOT test plan for their Adjacent Band Compatibility study, the FCC will wait for those tests to be conducted, which could take a considerable period of time.
Predictably LightSquared is already criticizing the DOT test plan, very likely setting us off on exactly the same well trodden (and ultimately disastrous) path as before. As a result, I’m sure that those hedge funds who committing funding to the bankruptcy plan (especially those in the $3B+ second lien, which sits behind $1.5B of first lien debt) must now be feeling pretty nervous. I wonder if any of them will now be frantically searching to see if they have any way to avoid funding these commitments once the FCC approves the transfer of control?
Finally, in yet more FCC-related news, the consensus here seems to be that the 14GHz ATG proceeding may also fail to reach a conclusion in the near term, as I predicted earlier this month, due to the uncertainty over how to protect NGSO systems. Instead, ViaSat’s Ka-band solution seems to be going from strength to strength, with the hugely positive reactions to the performance on JetBlue contributing to their recent win at Virgin America and to other airlines taking another look at what will be the best future-proof solution. All this makes Gogo’s predictions that its US market share is secure and that its revenue potential is “like a gazillion dollars” seem just as foolish as it sounds.
Its been interesting to note that AT&T and Verizon did not file any petitions to deny the AWS-3 license applications of DISH’s two Designated Entities, NorthStar and SNR, despite Verizon and AT&T both having earlier been vocal in denigrating DISH’s bidding strategy in their comments in the FCC’s bidding procedures docket 14-170.
Instead the opposition was left to a couple of small bidders plus a collection of ‘public interest’ organizations, who followed the path set out by Verizon, and alleged violations of antitrust laws by DISH and its DEs. DISH’s response argued that there was no antitrust violation and that the joint bidding arrangements (including realtime coordination of bids during each round, which most people including myself thought was not allowed) were fully disclosed.
While the eventual FCC decision on DISH’s $3.3B discount remains uncertain (and according to FCC Chairman Wheeler would not in any case involve denial of the licenses or reauctioning of the spectrum), it is far from a slam dunk (as some argued originally) that DISH will keep the discount. Nevertheless, it seems to me that Verizon and AT&T could even be better off if DISH kept the DE discount, and that might provide one reason why they held back from challenging DISH’s licenses directly.
Of course DISH would lose $3.3B if the DE discount was rejected, but in that case, DISH would acquire NorthStar and SNR under the terms of its agreements with the DEs, and would be free to consolidate and restructure its AWS-3 and AWS-4 spectrum holdings. After that, in my view, the most likely end game would be to spin-off all of DISH’s spectrum (AWS-3, AWS-4, 700MHz E-block, PCS H-block) into a holding company, which could lease individual licenses to any wireless operator, and raise perhaps $20B-$30B of debt at the spinco level, flowing that cash back up to DISH (and perhaps allowing Ergen to take some chips off the table).
Any repricing of the AWS-3 spectrum would presumably increase Ergen’s asking price for his leases, meaning that Verizon and AT&T might ultimately be the ones to suffer from the removal of the discount. In fact Verizon might even decide it had to pay up and pre-empt the spinoff because of the prospect that this arrangement would make more spectrum available in key markets for both T-Mobile and Sprint.
However, in order to execute these spinoff plans and enter into meaningful leases of AWS-4 spectrum, it is critical that DISH secures interoperability for its AWS-4 downlinks (2180-2200MHz) with the AWS-3 blocks. T-Mobile and Sprint know all too well that building out networks in bands without an ecosystem (such as T-Mobile’s deployment of WCDMA/HSPA in the AWS-1 band, which was ultimately abandoned, and Sprint’s PCS G-block LTE network) makes it much more difficult and expensive to secure handsets (hence there was no WCDMA iPhone operating in AWS-1 and Sprint had to guarantee billions of dollars of purchases to secure a G-block iPhone). As a result, they are unlikely to want to get into bed with DISH and make use of AWS-4 unless and until there is some guarantee of a handset ecosystem.
While DISH can pursue a band class designation for AWS-4 supplementary downlinks through 3GPP, we only need to look at the story of Band Classes 12 and 17 (in the lower 700MHz band) to see that a band class designation on its own, without any regulatory mandate for interoperability, is insufficient to ensure a handset ecosystem is created. And at the end of the day, the FCC was forced to intervene and broker a deal to ensure interoperability in the lower 700MHz band, before T-Mobile moved to buy 700MHz A block licenses for its low band coverage buildout.
Its therefore hardly surprising that AWS-3/4 interoperability was a key request of DISH in March 2014 before the auction, and fiercely opposed by Verizon and AT&T. At the time, the FCC decided not to impose a mandate, but strongly suggested that cooperative efforts should be made to ensure interoperability with AWS-4:
In the absence of technical impediments to interoperability, if the Commission determines that progress on interoperability has stalled in the standards process, future AWS-3 licensees are hereby on notice that the Commission will consider initiating a rulemaking regarding the extension of an interoperability mandate that includes AWS-4 (2180-2200 MHz) at that time. Should we undertake such a rulemaking, relevant considerations may include considerations of harmful interference, technical cost and difficulty of implementation, and the extent to which licensees are common to both the AWS-3 and AWS-4 bands.
Given the likelihood that AT&T and Verizon will engage in delaying tactics (not least due to the relatively short period in which DISH needs to start moving ahead on deployment), DISH will very probably need help from the FCC to push AWS-3/4 interoperability forward. However, if DISH is seen to have gamed the auction rules and secured an unwarranted multi-billion dollar discount, it will be far more difficult for the FCC to help out DISH on interoperability over AT&T and Verizon’s objections.
That might in fact be AT&T and Verizon’s ultimate goal: box DISH in with no possibility of a deal with T-Mobile or Sprint to put its AWS-4 spectrum to use, and wait for Charlie to cry uncle when he runs up against his AWS-4 buildout deadlines. Note that it is pretty much a foregone conclusion that the 4 year interim deadline to cover 40% of the population in each Economic Area by March 2017 will be missed, which will bring forward the final 70% coverage deadline to March 2020 (the timeline was extended to 8 years as part of the H-block deal in December 2013, but one year will be deducted if the interim deadline is not met).
Thus if DISH is unable to reach lease agreements with T-Mobile and/or Sprint for an AWS-4 buildout by the first half of 2017 at the latest (which will require interoperability to be secured in the next 18 months or so), Ergen will be under considerable pressure to moderate his price demands for a sale to Verizon or AT&T. As a result, AT&T and Verizon may win even more if DISH keeps the DE discount, than the $3.3B that DISH loses if the discount is rejected.
Despite it coming as a “surprise” to many reporters (and Wall St analysts) that DISH ended up with more total winning bids (before DE discounts) than Verizon in the AWS-3 spectrum auction, and that DISH got a 25% DE discount on its bids, the outcome is exactly what I predicted from the bidding patterns back in November. I was particularly amused to look back at Jonathan Chaplin’s comment from his December 7 report which poured scorn on my thesis, stating:
Some have suggested that DISH is distorting prices by bidding against themselves (DISH has three bidding entities that can’t communicate with each other during the auction). While possible, this is highly, highly unlikely.
[As a reader suggests, perhaps I should take this opportunity to note Chaplin's follow-up proposal on January 11 that DISH should do a LightSquared and set up a wholesale capacity business generating $10B per year. While possible, this is highly, highly unlikely.]
Its useful to examine exactly why DISH was so successful in driving up the price of the AWS-3 paired spectrum to a price far beyond anyone’s expectations. One of the key objectives for a bidder in the early rounds of an auction is to discover the amount of spectrum that its rivals are looking to acquire (only later does it become possible to discover how much they are prepared to pay for that spectrum). The price usually rises fastest in the key cities and then as the mix of demand becomes clear, bidders can switch over to second tier licenses knowing roughly how much spectrum they will end up being able to win.
We know that AT&T was looking to buy a paired 10MHz block, and it seems likely that Verizon would have been seeking roughly the same. Meanwhile T-Mobile wanted to selectively pick up one or two paired 5MHz blocks. If DISH hadn’t been bidding then everyone could have got what they wanted at close to the reserve price. However, adding DISH to the mix meant that the four key players were trying to buy more than the 2x25MHz of paired spectrum that was available.
More importantly, DISH was bidding through three separate entities and instructed them to bid on all the licenses simultaneously in key cities, to ensure that AT&T, Verizon and T-Mobile simply didn’t know how much spectrum each other and DISH were looking to buy.
The chart below shows the bidding patterns for the G, H, I and J blocks in New York (the G block is a smaller 2x5MHz CMA license, while the H and I blocks are 2x5MHz BEA licenses and the J block is a 2x10MHz BEA license).
We can see that all three DISH entities bid on every one of the New York paired license blocks they weren’t already holding all the way through Round 15, by which time the total combined gross price had reached $2.81B ($2.28/MHzPOP). In fact, it wasn’t until Round 18 (when the price reached $3.81B or $3.12/MHzPOP) that DISH’s bidding on these licenses began to slow (and SNR even overbid its own winning bid in Round 17).
[Incidentally, DISH's 3 entities combined were the biggest bidder for much of the auction, notably as late as Round 63, where they held $14.7B of gross PWBs or 35% of the $41.6B total, compared to $12.6B for AT&T, $10.5B for Verizon and $2.1B for T-Mobile. When the reserve price was met in Round 13, DISH held a total of $5.4B of PWBs, 44% of the $12.3B auction total at that point in time, compared to only $2.7B for AT&T, $2.1B for Verizon and $1.3B for T-Mobile.]
DISH clearly wrote the instructions to its DEs very well, because in the end there were very few cases where the final winning bid from SNR was topping an existing bid from NorthStar or vice versa (the largest license I’ve seen where this happened is the B1 unpaired license in Tampa BEA034 which sold for $21.4M before the DE discount). And it does seem that DISH complied with the letter of the rules: even though the FCC still needs to rule on whether the DE discount should be granted, it seems unlikely the FCC would want the auction to descend into chaos (which could theoretically result in a re-run).
However, its clear that the rules for future auctions will need to be rewritten significantly – I would expect severe restrictions on DE discounts and common ownership of different bidding entities at the very least. Indeed, it will now be very difficult to come up with a workable structure to advantage smaller operators like Sprint and T-Mobile in the incentive auction next year.
Where does the outcome leave us? Ergen did not buy a readily deployable collection of spectrum, instead seeking a blocking position in key cities (including New York and Chicago) in an attempt to force other operators to make a deal with him. Interestingly, most of DISH’s paired AWS-3 spectrum is in the G block, which is adjacent to and perhaps more quickly usable with the AWS-1 spectrum band, rather than being aggregated directly with the adjacent AWS-4 downlinks in the longer term like the J block. DISH also acquired most of the unpaired uplink blocks, which appears to be a hedge against the potential (and now perhaps likely) loss of LightSquared.
However, with AT&T winning enough AWS-3 to meet its spectrum needs (and make it highly indebted) for the next few years (not to mention AT&T’s ownership of DirecTV which makes a tie-up with DISH very difficult), it seems clear that Ergen is setting his sights squarely on a deal to sell DISH (or perhaps more likely lease its spectrum, given the difficulty of reaching agreement on a sale price) to Verizon.
So now, as I pointed out in November, the key question is whether Sprint will take this opportunity to satisfy Verizon’s spectrum needs through a sale of 2.5GHz spectrum? Given everyone in the industry is fed up with Charlie, that certainly seems like a plausible next step.
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